Weekly credit update: Fundamentals and technicals remain in support of credit

What’s on our mind

- General credit market news

• The past week has been rather stable for the credit markets with the iTraxx Main 1bp tighter and the iTraxx Crossover wider by 1bp.

• In terms of issuance in the Nordic region we note that Norwegian shipping company Stolt Nielsen placed a 5-year NOK1,100m bond with a coupon of 3M NIBOR plus 4.10%. Overall we continue to believe that most fundamentals and technicals are in favour of credit and that the ECB’s asset purchase programme will underpin the hunt for yield. Recent fund flows also show continued positive inflow in both IG and HY credit funds. However, the recent heavy issuance is making it difficult to digest the new issue pipeline.

• Danish financial institution Nykredit made headlines by stating that the new rules discussed by the Basel Committee are likely to cut Nykredit’s capital ratio in half should the proposed new capital floors be implemented. The idea is that all banks whether on standard model or IRB (internal models) will have to comply with the new standardised capital floors to a larger degree making the risk weights among banks more aligned. As the risk weights are much higher in the standard model, Nykredit and all the other larger Nordic banks that are on IRB will suffer from this. However, as we see it, the big uncertainty and risk are whether or not the regulators will require that the banks will have to meet the capital requirements incl. buffers based on the standard model or IRB. We believe they will choose the latter, which basically means that the banks 'only' need to meet the absolute minimum requirements with the standard model, i.e. 8% in total capital ratio and 4.5% in CET1. We believe all the Nordic banks under coverage will be able to do so.